More consolidation in EMS industry means fewer choices
As demand for electronics outsourcing slows, EMS providers will compete harder for OEM business
By Jim Carbone -- Purchasing, 10/2/2008 3:49:00 PM
OEM electronics buyers involved in outsourcing decisions should review their roster of electronics manufacturing services (EMS) providers carefully and rethink their outsourcing strategies.
The growth rate for the global electronics contract manufacturing industry is slowing and that means more consolidation and fewer outsourcing choices for buyers. A recent study by researcher iSuppli in El Segundo, Calif., says the compound annual growth rate (CAGR) for the industry will be 7.2% through 2012. That growth rate represents a major slowdown compared to past years. Global electronics outsourcing revenue rose at a CAGR of 15.5% from 2002 to 2007 and industry CAGR was 49% during the 1990s.
Slower growth also means segmentation in the industry as EMS providers compete by offering services that appeal to OEMs in specific higher-margin vertical markets such as medical or defense and aerospace rather than across multiple industries.
The good news for OEM buyers is that EMS providers will offer more value add, design and procurement services as a way to keep or win new business. However, in the short term, buyers may need to qualify new EMS providers if they want to maintain leverage.
“OEMs that outsource are very concerned about consolidation,” says Adam Pick, an EMS industry analyst for iSuppli. He says it marginalizes their ability to leverage their EMS spend.
A company may have three EMS providers, including two large EMS suppliers. If those two merge, suddenly perhaps up to 80% of the OEM’s outsource manufacturing spend could be with one EMS supplier.
Major electronics OEMs say they are carefully evaluating their EMS partners and their outsourcing strategies even if they are yet qualifying new suppliers.
“We've seen consolidation in the EMS industry and believe it is likely to continue as the industry continues to tighten down,” says Pascale Mardirossian, vice president of supply management worldwide operations for Sun Microsystems in Santa Clara, Calif. “We keep close alignment with our EMS suppliers to ensure their capabilities grow with our needs. And we monitor their financial health,” she says.
Pick says one reason for less revenue growth and consolidation in the EMS industry is that OEM customers have pulled back purchasing of components and other production materials from their EMS providers. Many OEMs when they outsourced manufacturing allowed the EMS providers to handle the sourcing and purchasing of parts for the equipment that the EMS provider was building for them.
EMS providers consolidated purchases from multiple OEM customers, leveraged those purchases with suppliers and realized considerable material costs savings. OEMs now have pulled back purchasing because they want those materials costs savings.
“For many EMS providers materials costs savings was a form of a revenue source for them,” says Pick. “Now that has largely disappeared.”
Also see: EMS industry grew 17% in 2007
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